Iran deal shakes up oil market as sector prepares for end of sanctions and new supply

I'm the digital editor at City A.M., and cover breaking news. I also co-host and co-produce the Unregulated podcast.

Follow Caitlin

Caitlin Morrison

Representatives from the US, the UK, China, France, Germany and Russia reached an agreement with Iran, which will see sanctions lifted

Iran has finally reached an agreement with Western negotiators over its nuclear programme, following years of discussions.

The deal will see Iran limit its capacity to build a nuclear bomb, in exchange for the lifting of economic sanctions on the country, including restrictions on its oil and gas industry.

The price of oil dipped again yesterday, with the benchmark Brent crude price dropping to as low as $56.43. Oil had been experiencing a rally in recent months, having plunged from over $100 last July to below $50 earlier this year.

Within the oil sector, experts had mixed opinions on what the deal signals for the market in the future, but on one point they were almost unanimous – the oil price will remain low in the near term as a result of Iranian sanctions being lifted.

However, some commentators are predicting a much more dramatic downward trajectory.

With production from the Organisation of Petroleum Exporting Countries remaining high over the last year, despite the period during which prices seemed to be in freefall, there is already massive over-supply in the market, and the addition of Iranian oil can only make things worse.

So one of the main factors influencing how much of an impact the Iran deal will have is timing. When will the sanctions be lifted, and how soon will Iranian oil being to reappear on the global market?

Full details of the deal have yet to emerge, although the deadline for sanctions to be lifted is reported to be 15 December.

Analysts agreed that oil sanctions were likely to be among the first to go, however there was no consensus on how quickly Iran could start pumping out the black gold.

“Keeping in mind that many Iranian oil wells were shut down in an orderly manner, the country’s fields could boost global supply within months,” said Nina Skero at the Centre for Economics and Business Research (CEBR) in London.

Skero added: “Additionally, Iran already holds substantial oil reserves that it can add to the global oil supply almost immediately.”

One analyst told City A.M. last night that various reports put Iran’s existing oil in floating storage at between 25m and 30m barrels.

While this could indeed be deployed fairly quickly, Hydrocarbon Capital’s Malcolm Graham-Wood pointed out that global consumption sits at above 90m barrels per day, so Iran’s stored supply is unlikely to have a major impact on the market.

Graham-Wood also highlighted a slight rally in the oil price yesterday afternoon, which he said was probably a “relief rally” due to the fact that a deal with Iran is no longer hanging over the commodity.

“The prophets of doom are probably overdoing it,” he said, describing market reaction as “rightly sanguine” given that it could take until the second half of 2016 before Iran is ready to start producing oil again.

Norbert Ruecker, head of commodities research at Julius Baer, predicted a similar timeline.

“Despite the euphoria, the deal has yet to master parliamentary hurdles,” he said, alluding to the fact that the US government has 60 days to decide whether to accept or reject the deal.

If the US votes to approve the agreement, Baer said: “Iran’s return is set to keep oil prices lower for longer, alongside ever-cheaper shale oil and peaking Western world oil demand.”

Low oil prices for longer will be welcome news to many businesses, but the deal also offers optimism to oil firms.

Pascal Menges, manager of the Lombard Odier Global Energy Fund, said: “On the medium term, the re-opening of Iran could be a ‘gold rush’ for oil services companies and integrated oil companies. Iran has already announced its willingness to propose attractive new fiscal contracts.”

And the big winners from yesterday’s announcement are, unsurprisingly, likely to be the world’s oil majors, including BP and Shell, which were both up slightly at the end of trading.

Although it could take a while before Western companies restart operations in the region, Graham-Wood told City A.M.: “Expect the arrivals lounge at Tehran airport to start filling up with Shell executives before long.”